In an extended low-yield environment, municipal bonds and related ETFs have continued to perform, attracting billions in new inflows this year.
The iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB) is the largest municipal bond ETF.
The increased flows into the munis market is attributed to ongoing concerns about the slow pace of global growth and prospects of an extended low interest-rate environment, especially after the recent disappointing jobs report. Moreover, low and even negative yields on global government bonds have made U.S. assets, including munis, increasingly more appealing relative to other fixed-income assets.
Related: Manage Volatility, Generate Income with Muni Bond ETFs
However, increasing speculation that the Federal Reserve is poised to raise interest rates before the end of the year has been weighing on yield-generating asset classes, including muni bonds. MUB has declined 2% in recent weeks.
“A 2% decline may not seem like much from a relative sense when viewed against the volatility in long-term Treasuries, high yield debt, or even stocks. However, this decline represents roughly half of one year’s average annual gain and may be a signal that this sector is due for a sharper correction,” reports ETF Daily News.
[related_stories]Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
Related: An Alternative Muni Bond ETF Strategy
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status. Recently, Japanese investors have gobbled up U.S. munis as a way of generating income as Japan maintains negative interest rates.
“New money may be eyeing these drops as a potentially buying opportunity, particularly in closed-end funds that are starting to display some value. The overriding factor for this sector is going to be driven by the direction of interest rates and investor appetite for risk,” adds ETF Daily News.
For more information on the munis market, visit our municipal bonds category.
iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB)
Tom Lydon’s clients own shares of MUB.